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Evidence On The Troubled Assets Relief Program, Bailout Size, Returns And Tail Risk

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  • Mthuli Ncube
  • Kjell Hausken

Abstract

The US government launched the Troubled Assets Relief Program (TARP) in mid-September 2008. This article analyzes the market response to the TARP launch. We reject the null hypothesis that the bailout size has no effect on the firm’s value. Banks receiving large bailouts endure significantly larger stock price declines than banks receiving small bailouts. The average buy-and-hold return from 2008 Q4 to 2009 Q1 is 42.68% for the 293 sampled banks. Bailout banks perform 5.8% worse than non-bailout banks. The banks’ losses increase significantly from the pre-TARP period to TARP initiation period, suggesting greater tail risk from 2008 Q4 to 2009 Q1. Bailout banks contribute much more to the overall systematic risk than nonbailout banks. TARP helped restore investors’ confidence, and closed December 19, 2014 with $15.3 billion profit. Finally some causal effects of bank bailouts are considered.

Suggested Citation

  • Mthuli Ncube & Kjell Hausken, 2019. "Evidence On The Troubled Assets Relief Program, Bailout Size, Returns And Tail Risk," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 13(2), pages 1-20.
    • Handle: RePEc:ibf:ijbfre:v:13:y:2019:i:2:p:1-20
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    References listed on IDEAS

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    1. Mthuli Ncube & Kjell Hausken, 2019. "Evidence On The Impact Of The Troubled Assets Relief Program On Stock Returns," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 13(1), pages 1-30.
    2. Brian Cadman & Mary Ellen Carter & Luann J. Lynch, 2012. "Executive Compensation Restrictions: Do They Restrict Firms’ Willingness to Participate in TARP?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 39(7-8), pages 997-1027, September.
    3. Berger, Allen N. & Roman, Raluca A., 2015. "Did TARP Banks Get Competitive Advantages?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(6), pages 1199-1236, December.
    4. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    5. Ivashina, Victoria & Scharfstein, David, 2010. "Bank lending during the financial crisis of 2008," Journal of Financial Economics, Elsevier, vol. 97(3), pages 319-338, September.
    6. Li, Lei, 2013. "TARP funds distribution and bank loan supply," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4777-4792.
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    1. Mthuli Ncube & Kjell Hausken, 2019. "Evidence On The Impact Of The Troubled Assets Relief Program On Stock Returns," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 13(1), pages 1-30.

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    More about this item

    Keywords

    TARP Bailout; Abnormal Returns; Tail Risk; Financial Crisis; Counterfactual;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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